Bombay seeks derivatives push, government entices foreign investors

The Bombay Stock Exchange (BSE) has revised its liquidity enhancement incentive programme for derivatives to ensure that the scheme’s participants provide continuous liquidity.

The new terms of the programme, which came into force on 27 December, place a threshold of Rs. 4.8 crore (US$900,000) on futures and Rs. 13.6 crore (US$2.5 million) for options, which must be traded every minute by the exchange’s members in order to receive incentives.

Prior to the changes, the thresholds were set at Rs. 600 crore (US$112.7 million) for futures and Rs 1,700 crore (US$399.3 million) for options, equally distributed over three time periods that spanned the Indian trading day.

According to local news reports, BSE officials claimed the change was necessary as most participants concentrated their trading activity during the first 15 minutes of each of the three sessions under the previous scheme.

Under both the old and revised scheme, BSE members are required to trade a total of Rs. 1,800 crore (US$338.1 million) for futures and Rs. 5,100 crore (US$958 million) for options daily to qualify for the incentives.

The BSE has also stated that market-making obligations for futures, in terms of quoted size and spread, will be retained even after the volume incentive cap has been reached. Previously, size and spread obligations were relaxed once members had fulfilled volume requirements.

The BSE’s move to stimulate derivatives trading followed a policy change from national regulator the Securities and Exchange Board of India (SEBI) in June 2011 permitting bourses to offer inducements to boost activity in the asset class.

The BSE’s main rival, the National Stock Exchange – which trades around 80% of equity trading volume in India – introduced its own derivatives incentive programme in September 2011.

Foreign investment push

Meanwhile, in its own bid to attract more liquidity to its shore, the Indian finance ministry has announced it will allow qualified foreign investors (QFIs) to invest directly into its equity market.

A statement from the government said the change would “attract more foreign funds, reduce market volatility and deepen the Indian capital market” and follows a move in the country’s 2011/12 budget announcement to allow QFIs to invest in mutual funds.

Under the new regime, the Reserve Bank of India will be given the power to designate QFI. The individual and combined stake QFIs would be able to take in an Indian company will be 5% and 10% respectively. More information from SEBI and the Reserve Bank of India on the QFI scheme is expected by 15 January.